Assume there are only two investment alternatives, China stocks and US stocks. You want to invest in one of the two or both alternatives. You were able to get the following data:

China-Stocks US-Stocks

Average return 8% 20%

Standard Deviation 25% 22%

Correlation -0.40

a. If you can only pick one security, which on will you choose?

b. A relative thins this is wrong. He says you are ignoring the big payoffs that you can get on

China stock. How would you go about alleviating his concern?

c. How would a portfolio composed of equal proportions in China stock and US stocks do in

terms of mean and variance?

d. You now learn that a major stock index provider will include all China stock in its most

popular index. At the same time, it will exclude hundreds of US companies from this index.

What effect will this have on your portfolios? Explain.